The $5 Trillion Question: What Should We Do With Fannie Mae and Freddie Mac?

An interactive review of 21 separate proposals to transition Fannie Mae and Freddie Mac to a new system of U.S. housing finance

 
  CAP Mortgage Finance Working Group Campbell-Peters (H.R. 1859) Miller-McCarthy (H.R. 2413) Isakson (S. 1963) Corker (S.1834) Hensarling (H.R.1182) National Association of Home Builders Mortgage Bankers Association Marron-Swagel Federal Reserve Bank of New York Hancock-Passmore (Federal Reserve Board) Zandi-DeRitis (Moody's) Millstein Credit Suisse Dynan-Gayer (Brookings) Financial Services Roundtable NYU Stern Scharfstein-Sunderam (Harvard) American Enterprise Institute Pozen Self-Help
OFFICIAL TITLE A Responsible Market for Housing Finance Housing Finance Reform Act of 2011 Secondary Market Facility for Residential Mortgages Act of 2011 Mortgage Finance Act of 2011 Residential Mortgage Market Privatization and Standardization Act GSE Bailout Elimination and Taxpayer Protection Act A Comprehensive Framework for Mortgage Finance System Reform MBA's Recommendations for the Future Government Role in the Core Secondary Mortgage Market Whither Fannie and Freddie? A Proposal for Reforming the Housing GSEs A Private Lender Cooperative Model for Residential Mortgage Finance An Analysis of Government Guarantees and the Functioning of Asset-Backed Securities Markets The Future of the Mortgage Finance System Housing Finance Reform — Restructuring the Government's Role Mortgage Market Comment: GSEs — Still the best answer for housing finance The Government's Role in the Housing Finance System: Where Do We Go from Here? Moving Beyond Fannie Mae and Freddie Mac A Blueprint for Mortgage Finance Reform The Economics of Housing Finance Reform Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market Toward a Three-Tiered Market for U.S. Home Mortgages Housing Finance Reform Outline
SUMMARY Privately funded, government-chartered entities guarantee timely payment of principal and interest on qualifying mortgage-backed securities, or MBSs. These guarantees are then reinsured by an explicit government guarantee, with a catastrophic risk insurance fund standing before the taxpayer. Private entities purchase and securitize certain mortgage products, then guarantee timely payment of principal and interest on those securities. That guarantee is backed by the explicit guarantee of the Federal Housing Finance Agency, or FHFA, with a reserve fund standing before the taxpayer. A wholly owned government corporation purchases and securitizes certain mortgage products originated by approved sellers and guarantees timely payment of principal and interest on those securities. The government stands behind all obligations of the entity, with a reinsurance fund standing before the taxpayer. A temporary government agency guarantees timely payment of principal and interest on qualifying mortgage-backed securities, with a catastrophic risk insurance fund standing before the taxpayer. The agency is terminated after 10 years and replaced with a fully private market. Wind down Fannie and Freddie over a 10-year period without an ongoing government guarantee on mortgage debt. Establish a new, purely private futures market for mortgage-backed securities (which eventually replaces the TBA market) based on minimum standards for underwriting, pooling and servicing agreements, and transparency. Wind down Fannie and Freddie completely over a 15-year period and establish a purely private market for housing finance, with no government guarantee beyond FHA and other existing affordable housing programs. Private entities purchase and securitize certain mortgage products. Originators pay into an MBS insurance fund, which is managed and guaranteed by the federal government. Privately funded, government-chartered entities purchase and securitize certain mortgage products, and guarantee timely payment of principal and interest on those securities, with risk retention from originators, issuers, and other secondary market entities. That guarantee is backed by an explicit government guarantee with a federal insurance fund standing before the taxpayer. Private companies, starting with restructured Fannie and Freddie, buy qualifying mortgages and bundle them into securities. The federal government guarantees payments of principal and interest on those securities, paid for by a fee charged to MBS issuers. Over time, other private firms such as bank subsidiaries are allowed to compete by securitizing conforming loans and purchasing the government guarantee. A government-chartered utility, mutually owned by financial institutions engaged in mortgage lending, buys and securitizes qualifying mortgages. The utility uses a mutualized loss pool, accumulated through MBS guarantee fees in addition to paid-in capital, to absorb credit losses, backed by an explicit, priced government reinsurance guarantee against catastrophic loss. A government bond insurer, organized as an independent federal agency along the lines of the Federal Deposit Insurance Corporation, guarantees timely payment of principal and interest on qualifying mortgage-backed securities, with a catastrophic insurance fund before the taxpayer. The agency has a line of credit with the Treasury accessible only when faced with catastrophic losses. Privately capitalized, federally chartered entities purchase qualifying mortgages, package them into securities, and guarantee payment of principal and interest on those securities. The federal government provides reinsurance on the mortgage-backed securities with a reserve fund before the taxpayer, and runs a single mortgage securitization facility to standardize the process. An independent government corporation (similar to the Federal Deposit Insurance Corporation) supervises the securitization of qualifying mortgages (issued and guaranteed by private firms) and reinsures qualifying mortgage-backed securities, with a privately funded reserve fund standing before the taxpayer. Split Fannie and Freddie into a "good bank" of well-capitalized, privately-held mortgage guarantees, and a "bad bank" of problem loans and securities. The "good bank" becomes a privately funded mortgage guarantor that provides a security-level guarantee on certain mortgage-backed securities. The federal government provides reinsurance wrap with a fee-based insurance fund standing before taxpayers. Private financial institutions issue mortgage-backed securities, with the choice of purchasing a government guarantee on qualifying mortgage-backed securities backed by "plain vanilla" mortgage loans. The government guarantor collects fee and builds an insurance fund that stands before the taxpayer.   Privately funded, government-chartered entities guarantee timely payment of principal and interest on qualifying mortgage-backed securities. These guarantees are then reinsured by an explicit government guarantee, with a privately funded reserve standing before the taxpayer. Move toward a privatized housing finance market by steadily phasing out the government guarantee. Start by establishing a temporary public-private partnership in which private sector sets the price for mortgage guarantees but guarantees only a fraction (say 25 percent) while the government insures the remainder, with an insurance fund standing before the taxpayer. A carefully regulated private market is the main supplier of mortgage credit, with a new government-owned corporation acting as "guarantor of last resort." In times of economic crisis, the government corporation issues and guarantees newly issued mortgage-backed securities, with strict caps on market activity during normal economic times (likely a 5 percent to 10 percent market share). Eliminate Fannie and Freddie and privatize their assets gradually. The federal government assumes a purely regulatory role in housing finance (outside of the Federal Housing Administration and other subsidy programs), with a focus on ensuring that a high preponderance of loans are prime, specifying when mortgage insurance must be purchased, and mandating that insurance companies have catastrophic contingency reserves. Gradually phase out Fannie and Freddie and replace it with a well-regulated private MBS market for conventional mortgages. New risk retention rules (namely the Qualified Residential Mortgage rule) will create a three-tiered market: Government-backed mortgage-backed securities comprised of FHA and VA loans; low-risk private mortgage-backed securities comprised of loans exempt from risk retention; and all other private mortgage-backed securities subject to risk retention. A single entity, owned broadly by banks and credit unions of all sizes, purchases and securitizes loans made by private originators and guarantees timely payment of principal and interest on those securities. The government reinsures that guarantee, with a privately funded reserve standing before the taxpayer.
WHO ISSUES QUALIFYING MORTGAGE-BACKED SECURITIES? Private entities. Private entities. The U.S. government. Private entities. Private entities. Private entities. Private entities. Private entities. Private entities. Private entities, as part of a government-chartered cooperative. Private entities or the U.S. government. Privately funded, government-chartered entities. Private entities. Private entities. Private entities. Private entities. Private entities. Private entities (except for times of economic crisis). Private entities. Private entities. A single private entity, owned by a cooperative of financial institutions.
WHO INSURES QUALIFYING MBS? Privately funded, government-chartered entities. Private entities. The U.S. government. The U.S. government (temporarily). Private entities. Private entities. The U.S. government. Privately funded, government-chartered entities. The U.S. government. Private entities, as part of the cooperative's mutualized loss pool. The utility may also sell off a small amount of credit risk to the market. The U.S. government. Privately funded, government-chartered entities. Private entities. Private entities. The U.S. government. Privately funded, government-chartered entities. Private entities. Private entities (except for times of economic crisis). Private entities. Private entities. A single private entity, owned by a cooperative of financial institutions.
NATURE OF THE GOVERNMENT GUARANTEE Explicit guarantee on qualifying mortgage-backed securities, which pays out when the covered entity fails. Neither the debt nor equity of the entity is backed by the government during normal economic times, but government-backed debt may be issued during deep economic downturns. Explicit guarantee on qualifying mortgage-backed securities, which pays out when the covered entity fails. Unclear whether the debt or equity of the institution can ever be backed by the government. The government stands behind all obligations of the government corporation. The government stands behind all qualifying mortgage-backed securities for 10 years. No government guarantee after that period. No government guarantee. No government guarantee. Explicit guarantee on principal and interest on qualifying mortgage-backed securities, which pays out only in catastrophic situations where private capital and insurance reserves are "depleted." Explicit security-level guarantee on qualifying mortgage-backed securities, called upon only in situations of "extreme market distress." Explicit guarantee on qualifying mortgage-backed securities, which pays out only after a firm's shareholders are wiped out. The entities themselves are not guaranteed. Explicit guarantee on pools of mortgage-backed securities, which pays out when the cooperative's mutual loss pool has eroded below a minimum threshold. Explicitly-priced guarantee on qualifying mortgage-backed securities covered by risk-based premiums, with a line of credit to cover catastrophic losses. Explicit guarantee on qualifying mortgage-backed securities, which only pays out after the covered entity suffers major losses. Explicit, priced government guarantee on qualifying mortgage-backed securities, with private MBS issuers and insurers as the first in line to cover losses. Explicit government guarantee on qualifying mortgage-backed securities, which pays out in a catastrophic loss scenario. Issuers have the choice to purchase an explicit government guarantee on timely payments of principal and interest for qualifying mortgage-backed securities. Explicit guarantee on qualifying mortgage-backed securities, which pays out only after private shareholders are wiped out and the reinsurance reserve is exhausted. The guarantee does not apply to the covered entities themselves, nor their debt. Explicit government guarantee on 75 percent of the credit risk for qualifying mortgage-backed securities, acting as a silent partner with the MBS issuer (in the interim). Government corporation issues and guarantees new mortgage-backed securities only when balance sheets of private issuers and guarantors are significantly constrained, with no private capital in the first loss position. No government guarantee on conventional mortgages. No government guarantee on conventional mortgages (beyond FHA and VA). Explicit, priced government guarantee on qualifying mortgage-backed securities, as well as a limited amount of entity debt approved by the regulator to ensure portfolio capacity.
PORTFOLIO INVESTMENTS BY COVERED ENTITY Generally permitted, as long as the investments are safe and serve some functional purpose (i.e., hard-to-securitize loans). Only permitted to purchase conventional or government-backed mortgage-backed securities, or any other securities deemed appropriate by the Federal Housing Finance Agency. Permitted to support multifamily housing and other mortgages that are not readily securitized, to provide countercyclical liquidity, and for loan modifications. Portfolio usually capped at $250 billion (adjusted for inflation). Not permitted. N/A (no covered entity) N/A (no covered entity) No specific recommendations. Generally not permitted, but can have a small portfolio for mortgages that are purchased but not yet securitized. Portfolio investments can also fund multifamily mortgages that are not easily securitized. Generally not permitted until there is adequate private competition, but can have a small portfolio for mortgages that are purchased but not yet securitized. Not permitted. Not permitted. Generally not permitted, but can have a small portfolio for warehousing loans before securitization, purchasing loans from smaller banks, developing new products, supporting certain loans for which there are limited markets, and loss mitigation. Limited portfolios permitted for liquidity and transactional purposes. Permitted with a graduated capital standard, but scaled back significantly (by $500 billion to $800 billion). Private firms are allowed to retain investment portfolios with some limits in size or composition. Small portfolios permitted to facilitate the development of new products, but cannot be used for speculative purposes. Not permitted in the interim (no government guarantee in the long run). Not permitted. N/A (no government guarantee). N/A (no government guarantee). Limited portfolio permitted for modified mortgages, hard-to-securitize loans, and small multifamily projects. The entity cannot hold loans or securities for arbitrage purposes.
AFFORDABLE HOUSING PROVISIONS Requirement to serve qualified borrowers throughout the United States, including underserved areas. Private firms pay into a special fund that helps test new products that expand access and affordability (the Mortgage Access Fund). No specific recommendations. Requirement to serve qualified borrowers throughout the United States, including underserved areas. No specific recommendations. No specific recommendations. Repeal the affordable housing goals and the housing trust fund. No specific recommendations. Government guarantee cannot be used for additional public or social housing policy goals. Policymakers should consider using any surpluses from the federal insurance fund to support affordable housing. End all affordable housing subsidies through Fannie and Freddie. Congress pursues these goals directly through traditional spending or tax policies. The utility does not have explicit affordable housing goals. The Federal Housing Administration takes the lead on this. No specific recommendations. Covered entities are not subject to affordable housing goals—the Federal Housing Administration serves this purpose. Policymakers may establish an explicit fee on insurance institutions to fund these goals. Remove the affordable housing goals, but consider maintaining some affordability initiatives in the restructured system. Remove the affordable housing mandate, with the exception of multifamily housing, leaving nearly all affordable housing loans under the purview of the Federal Housing Administration. Transfers the affordable housing goals to other parts of the government. Covered entities do not have explicit affordable housing goals. The Federal Housing Administration takes the lead on this. All efforts to assure housing affordability for low- and moderate-income households made explicit, on budget, and primarily the domain of the Federal Housing Administration. Remove the affordable housing goals. All efforts to expand affordable housing credit done through the Federal Housing Administration. All programs to assist low-income homeowners put on budget. Lower the upper limit of FHA loans and mandates a stricter FHA underwriting standard. All programs to assist low-income homeowners put on budget. Raise the down-payment requirement for FHA and VA programs and establish an income limit for program eligibility. Program eligibility is based on a specified percentage above the median family income for the metropolitan area. No specific recommendations, but the single-entity structure facilitates financing for sustainable loans to all qualified home buyers and owners, without discrimination.
MULTIFAMILY PROVISIONS Government guarantee applies to certain multifamily loans. Covered entities must show they are providing rental housing for working households and offering at least 50 percent of rental units with a securitized loan at 80 percent of area median income. Investment portfolio may be used to purchase multifamily loans (unclear whether only government-backed multifamily loans). Investment portfolio may be used to purchase multifamily loans. New agency defines what types of multifamily loans qualify for the government guarantee. New futures market covers single-family and multifamily mortgages. No specific recommendations. Existing Fannie and Freddie multifamily platforms transferred to the new framework. No specific recommendations. (Issue still under review.) No specific recommendations. Consider separating the support mechanisms for single- and multifamily lending, given the basic differences between the two markets. No specific recommendations. The covered entity's portfolio may be used to purchase multifamily loans. N/A Multifamily housing goals carry over to the new mortgage guarantor. Unclear whether the government guarantee applies to "plain vanilla" multifamily loans as well. Government guarantee applies to certain multifamily loans. No specific recommendations. No government guarantee on multifamily loans. No government guarantee on conventional multifamily loans. No government guarantee on conventional multifamily loans (beyond FHA and VA). Government guarantee applies to certain multifamily mortgage-backed securities, as well as certain small multifamily loans held in portfolio.
OVERSIGHT Federal regulator puts covered entities through yearly planning, reporting, and performance evaluation processes. Comptroller general determines the market value of the catastrophic guarantee. The Federal Housing Finance Agency establishes a pricing structure for guarantee fees that provides for reasonable rate of return. FHFA Board approves any product offered by the government corporation. The Federal Housing Finance Agency can set a minimum guarantee fee. New agency oversees the origination, servicing, and securitization process for qualified securities. Board of directors oversees the new agency's business. Federal banking agencies establish minimum standards for underwriting and develop uniform regulatory practices for the mortgage market. Establish a new industry-financed database to streamline mortgage securitization. No specific recommendations. A strong independent regulatory agency, governed by a board, oversees the covered MBS market and manages the insurance fund. An "investor-oriented" rating agency made up of large fixed-income investors develops criteria for private mortgage-backed securities. Federal regulator oversees the covered entities' products, pricing and capital adequacy. Industry participants, covered entities, the government reinsurance entity (could be Ginnie Mae), and federal regulators define the products covered by new guarantees. A federal regulator ensures the quality of the conforming loans and that entities maintain sufficient capital. The Federal Housing Finance Agency or another regulator oversees the cooperative's products and business, fee pricing (including veto power), risk management systems, and manages the tail risk insurance fund. Key decision-making authority on day-to-day management delegated to a board of directors made up primarily of cooperative members, with restrictions on the power of largest members. Members also monitor one another's participation in the utility. The new agency oversees all types of securitizations and asset-backed bond issuance, possibly including a new covered bond market. The government guarantee is limited to well-defined loan types with low loan-to-value ratios, controlled through borrower down payments, private forms of insurance, and other credit enhancements. A federal regulator (likely the Federal Housing Finance Agency) charters covered entities, establishes capital and liquidity requirements, determines underwriting standards and loan limits for qualifying mortgages, oversees the entities business practices, and manages the federal insurance fund. A government securitization facility (could be within Ginnie Mae) processes payments to investors and standardizes the entire securitization process. The government corporation supervises the securitization process for safety, soundness, and capital adequacy. Once privatized, the guarantee business should be subject to enhanced supervision by the Federal Reserve. The Federal Housing Finance Agency, in conjunction with Congress, defines the credit and operational box for the new mortgage guarantor. Guarantor business restricted to basic mortgage products with well-understood risk characteristics. No specific recommendations, but the government guarantee limited to high-quality mortgages that meet certain down-payment, credit score, and income documentation requirements. The appropriate federal agency charters and regulates covered entities, including capital and liquidity standards and standards for the quality of qualifying mortgages. Private investors determine the most appropriate organizational structure for each entity. Government insures that the private sector is well capitalized. Regulators can dismantle companies that pose a threat to the financial system. Government corporation works alongside strict regulation of mortgage underwriting and private-sector securitization. Set a preset limit on the government's market share that can only be waved with determination of systemic risk by the Financial Stability Oversight Board. Government restricts securitization to prime mortgages and mandates mortgage insurance for certain mortgages. Regulation serves to counteract the pressures the private sector feels to originate nonprime mortgages. Strong regulation of the private market, including capital requirements that reflect actual risks, more disclosure on loan pools, simpler MBS deal structures, and rules to limit "ratings shopping" among MBS issuers. Establish risk-retention exemptions that increase mortgage standardization and promote long-term, fixed-rate mortgages. The entity is governed by member institutions based on a "one lender, one vote" structure. The Federal Housing Finance Agency regulates the entity and ensures adequate capital reserves, appropriate lending and portfolio activity, and mission focus. Lenders selling loans to the entity must invest stock proportionate to the amount sold (say, 1 percent to 2 percent of loan balances), redeemable at par once loans pay off or earlier.
TRANSITION No specific recommendations. Places Fannie Mae and Freddie Mac into receivership within one year and reduces total mortgage assets to less than $250 billion within five years. Treasury develops a wind-down plan, including a reduction in mandatory dividend payments. Advisory board helps the new agency liquidate Fannie and Freddie. The agency is terminated after 10 years. Fannie and Freddie are gradually sold off to investors by at least 10 percent each year over 10 years. Guarantees business drawn down parallel to portfolio size. Appoint the Federal Housing Finance Agency as receiver of Fannie and Freddie (if deemed financially viable) and establish a holding corporation and dissolution trust fund to divide assets and liabilities. Over the first 15 years, scale back the guarantee business by increasing fees, decreasing loan limits, and restricting the type of mortgages the firms can purchase. The Federal Housing Finance Agency and the Treasury Department are then given a 10-year window to wind down Fannie and Freddie completely. No specific recommendations. Fannie and Freddie are used as the foundation for new private entities, starting with one or two with the option to build up more over time. Consider using a good bank/bad bank strategy to resolve their assets and liabilities. Start by converting Fannie and Freddie to private entities, with the government selling off its ownership stakes. The existing investment portfolios are wound down or sold to other investors. Set strict limits on their activities for 5—10 years while competition develops in the securitization industry. Each member provides equity capital to the cooperative to build initial ownership shares and a mutualized loss pool. Over time the loss pool accumulates through guarantee fees. No specific recommendations. Steadily reduce Fannie's and Freddie's portfolios until each portfolio is no greater than $250 billion. Lower the conforming and FHA loan limits. Transfer credit enhancement functions to the new regulator, securitization functions to the new facility, and affordable housing goals to the Federal Housing Administration. Immediately increase fees to increase reserves, build capital, and crowd-in private investment. Wind down retained portfolios to refocus on core guarantee business. Eliminate dividend on the outstanding Treasury Preferred Stock. Contribute Fannie and Freddie infrastructure to a new utility for issuing conforming mortgage-backed securities. Build reserves at the government corporation, re-charter the guarantee business at Fannie and Freddie, and recover taxpayer investments. At first Fannie and Freddie run the guarantor entity, with the potential for private competitors in the future. The government may need to provide seed money to overcome the potential difficulties in raising private capital for Fannie and Freddie, possibly by drawing new preferred stock from Treasury. No specific recommendations, but define new rules and regulations for the private mortgage market as soon as possible. No specific recommendations. Congress mandates a phased-in end to the government guarantee over the course of 10 years, either by reducing loan limits or increasing fees. Create a Resolution Trust Corporation to wind down Fannie and Freddie portfolios, with about 60 percent sold off within the first three years and the rest wound down gradually over the following seven years. Gradually increase fees at Fannie and Freddie and wind down their investment portfolios. Eventually transfer the Fannie and Freddie's information systems and personnel to the new government corporation. Phase out Fannie and Freddie through annual 20 percent reductions in conforming loan limits, raised capital requirements, and prohibitions from adding to their portfolios. Convert the conservatorship to a receivership and wipe out all equity below the Treasury‘s holdings. Divide Fannie and Freddie into good bank/bad bank structures and auction off all intellectual property, systems, customer relationships, and other company resources. Gradually phase out Fannie and Freddie by decreasing loan limits. Sunset Fannie and Freddie's exemption from risk-retention rules after a reasonable number of years. Similar to FDIC practice, the Federal Housing Finance Agency takes over Fannie and Freddie, transfers their assets and liabilities to the new entity, and wipes out their existing shareholders, all in a manner that does not disrupt the fragile housing market. Congress determines the fate of Treasury's preferred stock investments.